How stocks, bonds and other investments reacted to Fed rate hike

USA TODAY's Adam Shell tells us what to expect following the increase in interest rates on March 21.
USA TODAY

U.S. Federal Reserve Board Chairman Jerome Powell holds a news conference after a Federal Open Market Committee meeting in Washington, DC, on March 21, 2018. The Federal Reserve has announced its first interest rate hike of 2018, raising its benchmark interest rate by a quarter of a percentage point.(Photo: MICHAEL REYNOLDS, EPA-EFE)

The Federal Reserve didn't freak out Wall Street, and that should also reassure anyone with a 401(k).

Wall Street feared that the central bank would deliver bombshell news Wednesday of boosting its outlook for interest rate hikes this year from three to four. The Fed stuck with its forecast of three hikes, a calming message for investors, for sure, although not enough to keep stocks from finishing lower after a brief spurt upward.

The Fed, under its new chairman Jerome Powell, hiked interest rates Wednesday by a quarter percentage point to a range of 1.5% to 1.75%. But beyond that, it did little to spawn worries of a more aggressive pace of interest rate increases. Instead, the Powell-led Fed reiterated that they still favor "gradual" rate hikes.

Stocks

The stock market initially liked what it heard from the Fed and stocks shot up. But, as is often the case after the Fed provides investors with fresh information about its thinking, the market gave back its early gains after further digesting the Fed's message and closed with small losses.

The Dow Jones industrial average rallied a first, going from a 130-point gain before the Fed announcement to a gain of 250 points. But the gains fizzled, and the blue chip stock index closed down 45 points to 24,682.

Small stocks fared the best as they have less access to capital than larger companies do. Fewer Fed rate hikes this year are better for them if they need to borrow money. The small-cap Russell 2000 index rose 0.6%.

Three rate hikes this year instead of the feared four was viewed as a positive by Wall Street, as it takes off the table the risk of the Fed dialing up too many hikes and unintentionally harming the economy. Indeed, the Fed's upgraded outlook on the economy, coupled with its tame and unchanged forecast for inflation this year and in 2019, was also a good combination for stocks.

Bonds

Even though the Fed did not up the number of planned rate increases this year, its latest projections showed they now see three rate hikes in 2019, up from two.

Still, the Fed's message wasn't enough to prompt a feared sell-off in U.S. government bonds and a major rise in the yield on the benchmark 10-year Treasury note.

The 10-year note, which yielded 2.89% before the Fed statement, briefly rose as high as 2.94% -- still well shy of the 3% level which is seen as a key psychological level. The 10-year government bond hasn't closed above 3% since January 2014. It finished Wednesday's session lower than the day before at 2.885%.

Also working in the bond's favor was the fact the Fed didn't express worries about inflation spiking out of control, which makes the value of a bond's yield worth less.

Gold

Gold, which often rises in value when inflation expectations are on the rise, rose sharply. An ounce of gold was up $21, or 1.6%, to $1,339. Gold rose for two reasons. One, the Fed's market-friendly message halted a sharp rise in bond yields, which created less competition for gold. Investors might also be wagering that the Fed's decision not to hike rates four times this year could eventually lead to a spike in inflation. Gold, other metals and commodities, such as oil, are viewed as hedges against inflation. A barrel of U.S. produced crude jumped about 3% today to $65.50 per gallon.